ND Expert: Yuan exchange rate is significant factor in U.S.-China trade imbalance

Author: Shannon Chapla

China’s central bank has promised to improve its Yuan exchange rate, as President Hu Jintao prepares for a summit with President Obama later this month in which both nations will try to resolve their currency dispute.

Jeffrey Bergstrand

According to Jeffrey Bergstrand, finance professor and international trade expert at the University of Notre Dame, the Yuan exchange rate system does play a significant role in the large trade imbalance between the U.S. and China.

“When a country is developing and its per capita income is rising, the relative price of its non-tradable goods tends to rise, and that can cause a real appreciation of its currency,” Bergstrand says. “So, it’s almost a natural economic law that when two countries have such vast differences in their per capita GDP growth rates − China’s is much larger than the United States’ − its currency should appreciate.

“In the last six months,” Bergstrand says, “China’s currency has appreciated about two percent, which suggests it may be ready to allow for a fairly large adjustment. China should be maintaining a four percent appreciation per year.”

Chinese officials say they have been making efforts to boost imports of U.S. products, but Bergstrand says more is needed.

“They have relaxed certain tariffs on some products from the U.S. among other restrictions,” he says. “That will boost some of our exports to China, but none is so strong or on such a wide array of goods as to substantively increase our exports to them.”

One of the world’s foremost experts on international trade, Bergstrand has been a finance professor in Notre Dame’s Mendoza College of Business for more than 20 years and a research associate of CESifo, an international network of researchers based in Europe. His research on international trade flows, free trade agreements, foreign direct investment, multinational firms, and exchange rates has been published in more than 50 articles in journals including the American Economic Review.

Bergstrand’s article about how much free-trade agreements impact trade flows was recently recognized as the most-cited research paper published in the Journal of International Economics 2005-2009.

Media Advisory: Bergstrand’s comments may be used in whole or in part. He is available for interviews and can be reached at 574-631-6761 or Bergstrand.1@nd.edu